Tredegar recorded tax expense of $8.4 million on pretax net income of $59.8 million in the first nine months of 2019. Therefore, the effective tax rate in the first nine months of 2019 was 14.1%, compared to 172.1% in the first nine months of 2018. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first nine months of the year. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the nine months ended September 30, 2019 and 2018 are as follows:



(In thousands, except percentages)	2019					2018
Nine Months Ended September 30,	Amount			%		Amount			%
Income tax expense at federal statutory rate	$	12,562		21.0		$	383		21.0
U.S. Tax on Foreign Branch Income	2,541			4.2		953			52.3
Foreign rate differences	1,864			3.1		1,159			63.6
State taxes, net of federal income tax benefit	633			1.1		87			4.8
Non-deductible expenses	363			0.6		230			12.6
Goodwill impairment	—			—		1,788			98.2
Valuation allowance for capital loss carry-forwards	—			—		245			13.4
Stock-based compensation	(148		)	(0.2	)	173			9.5
Changes in estimates related to prior year tax provision	(188		)	(0.3	)	(414		)	(22.7	)
Research and development tax credit	(475		)	(0.8	)	(318		)	(17.4	)
Foreign Derived Intangible Income (FDII)	(633		)	(1.1	)	(472		)	(25.9	)
Tax impact of dividend received	(1,016		)	(1.7	)	—			—
Foreign tax incentives	(2,157		)	(3.6	)	(1,344		)	(73.8	)
Valuation allowance due to foreign losses and impairments	(2,395		)	(4.0	)	185			10.1
Tax contingency accruals and tax settlements	(2,527		)	(4.2	)	480			26.4
Effective income tax rate	$	8,424		14.1		$	3,135		172.1

Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $2.1 million and $1.3 million in the first nine months of 2019 and 2018, respectively.

Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.

In the third quarter of 2019, the IRS concluded its examination of the years 2014, 2015, 2016, and 2017, requiring only minor adjustments for those years. With the audit concluding during the third quarter, the Company considers the years 2014-2017 to be effectively settled, allowing for the reversal of $2.4 million of the reserves previously established for uncertain tax positions.

The Company includes tax-related interest and penalties in income tax expense. As of September 30, 2019, $0.2 million of interest and penalties are accrued as a tax liability. During the nine months ended September 30, 2019, a minimal amount of net interest income was recorded.